An extremist, not a fanatic

February 26, 2010

Profits in the recession

It’s been an unusually good recession for capitalists. Today’s figures show that the share of profits in GDP rose to 23.3% in Q4. This is higher than it was at the start of the recession.This is unusual. In the previous three recessions, the profit share fell, and did not return to the level it hit at the cyclical peak in GDP until some time after the recovery: five quarters after the trough in GDP after the 70s and 80s recessions, and 10 quarters after the 1990-91 recession.So, why the difference?One possibility is that sterling’s fall has allowed profit margins to expand; this is perfectly consistent with the fact that it’s had little impact on trade volumes. A second possibility - though Q4 data is not yet available - is that that it is financial companies’ profits that have done well*, helped by low interest rates and other government support. And a third answer - consistent with both these - is that massive government borrowing has helped raise profits; this much is true as a national accounts identity.Whatever the reason, the capitalist class is resilient to recession.* Debt write-offs are not included in these numbers.

Comments

Interesting analysis. I imagine that those not fortunate enough to be in the 'capitalist class' (i.e. 99% of people I guess) would look at this trend and feel uncomfortable, particularly given that it was this class' actions that lead to the current recession - and that they seem immune to the ravages of the slump they created.

Do you think (and I might be displaying Osborne-esque ignorance of economics here...) that profits could also be up because corporations are less accountable to their workers, the public and/or customers? An analogy I've used in the past is the amount of profit made by selling football shirts and video games - yes there's high demand so price is high, but profit margins are high because unaccountable companies divert more turnover to profit than re-investment or salary, essentially 'because they can get away with it politically.'

Prateekbuch, back to intro economics you need to remember that anyone who owns stock is a capitalist will benefit from a profit increase. Since all pension funds including government workers own stock the majority of us are capitalists.
Second, the reason for profit increases is the change in investment strategy by today's management. In the "bad old day's" managers stopped capital spending during recessions. They have changed their strategy so that during the last few recessions managers have continued to invest in productivity enhancing capital. The result is today firms can increase output without increasing labor. The result a rapid increase in profits during the early stages of the recovery. Both simple economics.